Understanding 529 Plans
November 15, 2021

While 529 College Plans have been around for more than two decades, helping people save for their children’s tuition, it’s less well-known that the plans can be used for sidestepping certain taxes.

First off, let’s explain just what a 529 plan is and who can open one. Anyone 18 or over can open a 529 and it does not need to be the parent or grandparent of the beneficiary, however a beneficiary must be named for the account. The beneficiary can be any age.

Funding a 529 plan does not bring a federal individual tax deduction, but can bring state deductions depending on where you live. In Pennsylvania, there is “tax parity,” which means you can deduct contributions to any 529 plan. The Pennsylvania 529 Investment Plan is managed by the Pennsylvania Treasury Department, with record-keeping and investment services provided by Ascensus College Savings and The Vanguard Group, respectively.

The program features three age-based investment options and 14 static investment options, including a socially responsible equity portfolio, using Vanguard-managed portfolios. The Guaranteed Savings Plan, available only to Pennsylvania residents, protects plan owners from increasing tuition costs.

Another key part of 529 plans is that the account funds are owned by the person who opened it, not the beneficiary. This means the plan owner can choose to use the money for a different purpose, should circumstances change. The funds allocated to the beneficiary can also be adjusted once each year.

Keep in mind, that money in the 529 doesn’t have to be used for a named beneficiary, but can be held for a succeeding generation of college students. No gift or generation-skipping taxes are applied in that event.

An added benefit to the college savings plan is that it is an exception to federal estate tax rules. As such, the savings are not considered part of the owner’s taxable estate when he or she dies and can mean wealthier families can save estate and inheritance taxes for future generations.

It’s also worth noting that a 529 plan is not subject to capital gains or typical income taxes. When a withdrawal is made and used for a qualified purpose, no taxes are incurred. Tuition for both undergraduate and graduate programs are qualified expenditures in any state where the beneficiary lives or attends school.

As always, it’s advisable to discuss 529 plans and all financial matters with a professional tax advisor. We are here to help guide you.



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